Bills of Exchange
What is Bills of Exchange?
The person who makes or writes the Bill of Exchange.
Key formula / rule: Maturity Date Calculation
Key points
- Understand the definition and parties to a Bill of Exchange.
- Differentiate between a Bill of Exchange and a Promissory Note.
- Explain the process of acceptance and endorsement.
- Analyze the accounting treatment of Bills of Exchange.
Common exam trap
Confusing the roles of drawer and drawee.
Definitions
- Term
Drawer
- Meaning
The person who makes or writes the Bill of Exchange.
- Term
Drawee
- Meaning
The person on whom the Bill of Exchange is made, and who is ordered to pay.
- Term
Payee
- Meaning
The person to whom the payment is to be made.
- Term
Acceptance
- Meaning
The act of the drawee agreeing to pay the bill, usually by signing it.
- Term
Endorsement
- Meaning
Signing the bill on the back, typically to transfer ownership to another party.
- Term
Discounting
- Meaning
Selling a bill of exchange to a bank before its maturity date to receive cash immediately, minus a discount (interest).
- Term
Dishonour
- Meaning
When a bill is not accepted by the drawee or not paid by the acceptor on the due date.
- Term
Days of Grace
- Meaning
A customary period (usually three days) added to the period specified in a bill for payment, unless the bill states otherwise.
Learning objectives
Understand the definition and parties to a Bill of Exchange.
Differentiate between a Bill of Exchange and a Promissory Note.
Explain the process of acceptance and endorsement.
Analyze the accounting treatment of Bills of Exchange.
Understand the concept of discounting and dishonour.
Formulae
- Name
Maturity Date Calculation
- Note
Days of grace are not allowed in case of bills payable on demand or after sight.
- Expression
Date of Bill + Bill Period + Days of Grace (usually 3 days)
- Name
Interest on Dishonoured Bill (from Drawer's perspective)
- Note
This is charged to the party who dishonoured the bill.
- Expression
Principal Amount × (Rate of Interest / 100) × (Period from Date of Dishonour to Actual Payment / 365)
Prerequisites
Basic accounting principles.
Understanding of credit and debt.
Knowledge of commercial terms.
Common mistakes
Confusing the roles of drawer and drawee.
Assuming the bill is automatically valid without acceptance.
Not understanding the implications of endorsement and discounting.
Forgetting the secondary liability of the drawer.
Miscalculating maturity dates.
Keywords
Bill of Exchange
Negotiable Instrument
Drawer
Drawee
Payee
Acceptance
Endorsement
Discounting
Dishonour
Maturity Date
Days of Grace
Promissory Note
Practice preview
What is 'endorsement' of a Bill of Exchange?…
medium
Who is the 'drawer' in a Bill of Exchange?…
easy
What is a Bill of Exchange?…
easy